Protecting Microfinance Borrowers

May, 2005     Brigit Helms, David Porteous

Around the world, the microfinance community is paying more attention to consumer protection. Controversial topics, such as high interest rates and the overindebtedness of borrowers, have raised public concern for poor consumers in countries far and wide, from Bolivia to Bangladesh to South Africa and beyond. Yet relatively little is known about how consumer protection might apply to financial services for the poor.

The very success of microfinance in demonstrating that poor people can and do repay loans has encouraged commercial lenders to enter some markets, and more commercialization is expected in the future. Increasing commercialization has heightened awareness of consumer issues. While greater competition is likely to expand access to financial services to more and more people, it may also open the market to lenders who are less concerned with socially responsible lending principles than are specialized microfinance institutions (MFIs). As a consequence, vulnerable borrowers are being more exposed to potentially abusive lenders. This is attracting the attention of regulators and politicians.

Moral arguments for consumer protection in microfinance focus on the imbalance of power between lenders and borrowers. Individuals who are functionally illiterate, first-time consumers, or different in language or ethnicity from the staff of financial institutions are particularly vulnerable. Even middle-income, relatively educated borrowers may be insufficiently informed about their rights and can be pressured into making poor borrowing decisions.